Monday, August 05, 2013

The Chicken Tax--Bad and Good

There is an interesting piece in the Detroit News today about the possible impact of the "Chicken Tax", the 25% import duty on foreign built (exa-NAFTA) pickup trucks. According to "analysts", pickup trucks in the U.S. may have a several thousand dollar premium compared to what they would cost without the protectionist tariff.

The average selling price of full-size pickups has grown at more than twice the rate of the overall industry — cars and trucks combined — since 2005. The average truck sells for more than $40,000, nearly $9,000 more than the average vehicle, according to automotive research firmEdmunds.com. Automakers in recent years have added more luxury items to pickup trucks — and cars, too — so it's difficult to pinpoint how much an uncompetitive market can be attributed to price.

But Jesse Toprak, an analyst for vehicle pricing website TrueCar.com, said in a telephone interview that weak competition in the truck segment results in a "couple-thousand-dollar premium" paid by consumers.

The Chicken Tax, like any other protection tariff, has both bad and good effects.

Bad Effects

Less consumer choice--

We can't have the globally built small/midsized pickups that are sold overseas because with a 25% tariff no one would buy them.

Higher prices--

local production is done in part by UAW labor, which is more expensive than overseas labor.

Foreign retaliation

Good Effects

Local production means more jobs, and more business in U.S (and NAFTA region). If you add up direct and indirect jobs, thousands of Americans (and Mexicans and Canadians) are employed because of local truck production. Some are unionized but many are not.

Higher quality pickup trucks. Due to the high cost of entry, only large established players like Toyota and Nissan have the means to set up a local plant to build trucks--so they have to bring high quality, high margin products. Cheap junk won't fly. Marginal brands like Mahindra or Great Wall have a hard time making a business case for low cost products, due to the high barriers of local labor costs and the regulatory environment.

Judging by the sales numbers (number one selling vehicle is F150, followed by Chevrolet Silverado) the higher prices do not seem to hurt pickup truck sales. Trucks have become a luxury good, as much as a work tool, and people are willing to pay $40,000 for a loaded pickup truck.